U.S. Supreme Court Holds Challenge To Colorado’s Sales And Use Tax Notice And Reporting Requirements Not Barred By Tax Injunction Act

On March 3, the U.S. Supreme Court unanimously held that the Tax Injunction Act (TIA)1 did not bar a challenge in federal court of Colorado's sales and use tax notice and reporting requirements for out-of-state (remote) retailers.2 The U.S. Supreme Court reversed and remanded a decision by the Tenth Circuit of the U.S. Court of Appeals that had held that the TIA deprived the U.S. District Court of jurisdiction to enjoin Colorado's notice and reporting requirements. Previously, the District Court had determined that Colorado's notice and reporting requirements violated the Commerce Clause of the U.S. Constitution. In remanding the case, the Supreme Court did not consider the underlying merits of the challenges to Colorado's notice and reporting requirements, which will need to be addressed by the federal courts.

Background

The Direct Marketing Association (DMA), which consists of businesses and organizations that market products directly to consumers via catalogs, print advertisements, broadcast media and the Internet, filed a lawsuit against the Colorado Department of Revenue in U.S. District Court. In its lawsuit, DMA challenged the constitutionality of Colorado's sales and use tax notice and reporting requirements for remote retailers by asserting violations of the Commerce Clause.3

The District Court granted DMA's motion for preliminary injunction against the Department that prevented enforcement of the notice and reporting requirements on remote retailers pending a final determination in this case.4 Both DMA and the Department subsequently filed cross motions for summary judgment. The District Court granted a motion for summary judgment in favor of DMA and issued a permanent injunction against the Department that enjoined the enforcement of the notice and reporting requirements.5 In reaching this decision, the District Court concluded that Colorado's notice and reporting requirements discriminated against and placed undue burdens on interstate commerce, in violation of the Commerce Clause. The Department appealed the District Court's decision.

U.S. Court of Appeals Decision

On appeal, the Tenth Circuit of the U.S. Court of Appeals held that the TIA precluded federal jurisdiction over DMA's claims.6 The TIA provides that federal "district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State."7 The Court of Appeals acknowledged that this "differs from the prototypical TIA case," but found that the case was barred by the TIA because, if successful, it "would limit, restrict, or hold back the state's chosen method of enforcing its tax laws and generating revenue." After determining that the TIA deprived the District Court of jurisdiction, the Court of Appeals remanded the case to dissolve the permanent injunction and to dismiss the Commerce Clause claims raised by DMA. Because the Court of Appeals determined that it did not have jurisdiction over the case, it did not consider the substantive aspects of Colorado's notice and reporting requirements, including whether such requirements violated constitutional provisions. DMA appealed this decision and the U.S. Supreme Court agreed to consider the case.

Notice and Reporting Requirements

On February 24, 2010, Colorado enacted legislation (the Act) that imposes notification and reporting requirements on remote retailers making Colorado sales.8 Under the Act and the associated regulations promulgated by the Department, remote retailers that did not collect Colorado sales tax are required to notify Colorado customers that they are obligated to self-report and remit use tax on their purchases.9 Remote retailers that did not collect tax are also required to provide Colorado customers with an annual report by January 31 of each year, via first-class mail, detailing a customer's purchases in the previous year and notifying the customer that the retailer was required to report the customer's name and amount of purchases to the Department.10 Finally, remote retailers that did not collect tax are also required to report to the Department, the name, billing address, shipping address and total amount of purchases made by Colorado customers by March 1 of each year.11 Under the state's regulations, however, certain de minimis retailers, or retailers with de minimis purchasers, are not subject to these requirements.12

TIA Does Not Bar Jurisdiction

In deciding that the TIA did not bar the District Court from considering DMA's claims, the Supreme Court was...

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